Rupee to gain strength vs dollar with expected IMF tranche, trade surplus

• Analysts say rupee set to breach the 280 level.
• US dollar closed at Rs286.76 in interbank market.
• Rupee may face minor resistance near 275 level.

KARACHI: The Pakistani rupee is gaining strength day by day with expectations of the US dollar to fall below 280 in the coming days, as the possibility of receiving the International Monetary Fund's (IMF) next tranche, better balance of payments and the government's actions against illegal dollar trade boost investor confidence.

In the interbank market, the dollar closed at Rs286.76. The rupee continued its upward trajectory with 282.69 on Friday, witnessing a 1.4% gain.

The rupee, according to analysts at Tresmark, a financial services platform, is set to breach the 280 level and may only face minor resistance near the 275 level.

“The 275 level is simply a ‘goal based' level — that some consolidation at that level should be acceptable to all,” said Tresmark in a note.

The rupee will strengthen due to a number of factors, including the IMF appears to be moving towards approval of another tranche that will give the rupee wings; the closure of the Afghan border has reduced smuggling, especially of gold, which was the primary means of wealth transfer; the current account is expected to show a surplus; and remittances are anticipated to come as a pleasant surprise, it said.

The actions taken by the government to stop the misuse of the Afghan Transit Trade (ATT) and the further drop in oil prices will be very beneficial to the balance of payments, supporting the rupee, it added.

“So while it seems that the rupee is heading towards “Stronger for longer” the two key risks are political turmoil and the IMF acceptance. Both which we assess are in control at the moment.”

The latest trade deficit figures for Pakistan unveiled a positive trend. This improvement, coupled with an uptick in remittances raises the prospect of a potential current account surplus. This development could act as a counterbalance to the current account deficit observed in the preceding months of July and August.

The country’s trade gap fell 42% year-on-year to $5.3 billion in the first quarter (July-September) of the current fiscal year.

The current account deficit in August was $160 million, which was a 79% decrease from the same month a year earlier. The current account deficit dropped 54% to $935 million in the first two months of FY2024. The fall in the deficit was due to a decline in imports.

The IMF in July approved a nine-month, $3 billion bailout package for Pakistan.

The country received $1.2 billion from the IMF as the first tranche of a stand-by arrangement in July and the second review of the loan programme is scheduled for November.

The rupee had dropped by 6% against the dollar since the caretaker government assumed office in August.

Later, the rupee appreciated by 8% from 307 to 282 in five weeks as a result of actions taken by the government and the State Bank of Pakistan to stop currency smuggling, hoarding and speculation, particularly in the open market. In addition, the open market's premium over the bank rate decreased to 0.1% from a peak of 7.4% on September 1.